Shill of the Week - C.D. Howe Institute: Knowledge Driven Revolution

The Shill of the Week is dedicated to the chearleaders of power who will defend them regardless of the evidence. Since this is exactly what politicians and the corporate media do for a living it is only appropriate to award those who rise above and beyond the call of duty.

Foreign investors flock to Canada

Related - Privatizing Canada Post would improve 'anachronistic' mail carrier: C.D. Howe Institute

Record amounts of foreign money flowed into Canada's private- equity sector last year, but a study released yesterday said restrictive cross-border tax laws are preventing hundreds of millions of dollars more from reaching cash-starved companies.

In 2006, buyout funds invested US$10.9-billion in Canadian companies, more than double the amount from the previous year, according to Canada's Venture Capital and Private Equity Association. Approximately three-quarters of these investments were made by funds from outside Canada, with last year's biggest deals including the takeovers of Four Seasons Hotels, Fairmont Hotels & Resorts, Inc. and Intrawest Corp.

Canadian buyout funds raised a record $6.4-billion, more than four times the $1.5-billion raised in 2005.

But these totals could have been much higher if foreign investors weren't faced with tax rules that threaten to take a big bite out of their profits, particularly when they want to sell their Canadian investments, according to a study by the C.D. Howe Institute.

The government should change its tax policies for foreign investors regarding private company share sales, and permit the tax-free rollover of shares of a Canadian company into a foreign company, said Stephen Hurwitz and Louis Marett, the report's authors and partners at Boston-based law firm Choate, Hall & Stewart.

"Without change, capital starved Canadian companies will fail to commercialize much of the nation's R&D investment, raising the risk of Canada squandering a significant share of its intellectual capital, and needlessly imperiling its future economic growth," said Mr. Hurwitz and Mr. Marett.

Private-equity firms have been jumping through hoops to structure deals so they can avoid the tax hits. But since this is costly and time-consuming, it may only be worthwhile for larger deals. That means less incentive for foreigners to invest in the smaller end of the market, such as venture-capital funds.

In this sector U.S. fundraising far outpaces that in Canada, where the average venture capital investment was $4.2-million in 2006, compared with US$10.1- million in the United States, according to the CVCA.

---------

Foreign

Canada's strongest venture markets, Ontario and Quebec, slipped to 9th and 10th in fundraising in North America by state and province, down from 7th and 9th the year before and behind Colorado, Maryland and New Jersey.

This lack of capital means many Canadian venture funds end up with low returns, which feeds into the downward cycle by making it tough to attract investors.

"Canadian tax impediments ... hinder Canadian companies in their competition in the global marketplace for access to much needed U.S. investment capital and its associated human capital," the report said. "Canada's predicament will only worsen as other countries ... take increasingly vigorous stands to attract foreign capital."

There are still numerous opportunities in Canada for both domestic and foreign investors, said Rick Nathan, president of the CVCA and managing director at private equity firm Kensington Capital Management.

"Some people think there's too much money going after too few deals. In fact, we're growing as fast as we can and we're barely keeping up with the activity in our own markets," Mr. Nathan said.

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Shill of the Week: C.D. Howe Institute

Foreign investors flock to Canada